1. Assume that Disney Corp has a 30 year, 5.5% coupon bond. Given Ford’s recent troubles, your broker indicates that the interest rate of this bond should be 7.25%. Assume that coupon payments are annual. What should be the price of this bond?
2. Consider a risky portfolio. The end of year cash flow derived from the portfolio is either $80,000 or $180,000 with equal probabilities of 0.5. The alternative risk free investment in T-Bill pays 6% per year.
a. If you require a risk premium of 5% how much will you be willing to pay for the portfolio?
b. Suppose that the portfolio can be purchased for the amount you found in part a. What will be the expected rate of return on the portfolio?